10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011.

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 001-33930

IPC THE HOSPITALIST COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4562058
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4605 Lankershim Boulevard, Suite 617 North Hollywood, California	91602
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (888) 447-2362

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of October 19, 2011, there were 16,444,409 shares of the registrant’s common stock, $0.001 par value, outstanding.

IPC The Hospitalist Company, Inc.

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

		Page
	PART I
Item 1	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010		3
	Consolidated Statements of Income – Three and nine months ended September 30, 2011 and 2010		4
	Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010		5
	Notes to Consolidated Financial Statements		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3	Quantitative and Qualitative Disclosures about Market Risk		20
Item 4	Controls and Procedures		20
	PART II
Item 1	Legal Proceedings		21
Item 6	Exhibits		21
Signatures			22
Exhibit Index			23

Note: Items 1A, 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IPC The Hospitalist Company, Inc.

Consolidated Balance Sheets

(dollars in thousands, except for share data)

	September 30, 2011		December 31, 2010
	(Unaudited)		(Adjusted)
Assets
Current assets:
Cash and cash equivalents	$	32,035	$	18,935
Accounts receivable, net		62,897		54,161
Insurance receivable for malpractice claims – current portion		8,044		6,491
Prepaid expenses and other current assets		4,678		9,672
Total current assets		107,654		89,259
Property and equipment, net		4,510		4,100
Goodwill		164,400		149,289
Other intangible assets, net		1,726		2,282
Deferred tax assets, net		2,323		2,323
Insurance receivable for malpractice claims – less current portion		14,531		11,725
Total assets	$	295,144	$	258,978
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	3,713	$	3,708
Accrued compensation		24,251		19,472
Payables for practice acquisitions		24,250		27,715
Medical malpractice and self-insurance reserves, current portion		8,627		6,940
Deferred tax liabilities		784		784
Total current liabilities		61,625		58,619
Medical malpractice and self-insurance reserves, less current portion		31,320		25,871
Other long-term liabilities		23		23
Total liabilities		92,968		84,513
Stockholders’ equity:
Preferred stock, $0.001 par value, 15,000,000 shares authorized, none issued		0		0
Common stock, $0.001 par value, 50,000,000 shares authorized, 16,443,255 and 16,287,377 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		16		16
Additional paid-in capital		137,663		130,661
Retained earnings		64,497		43,788
Total stockholders’ equity		202,176		174,465
Total liabilities and stockholders’ equity	$	295,144	$	258,978

The accompanying notes are an integral part of these consolidated financial statements.

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IPC The Hospitalist Company, Inc.

Consolidated Statements of Income

(dollars in thousands, except for per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net revenue	$	114,485		$	90,897		$	339,604		$	266,240
Operating expenses:
Cost of services – physician practice salaries,     benefits and other		84,920			66,051			248,801			192,763
General and administrative		18,081			14,609			54,275			43,497
Net change in fair value of contingent consideration		178			115			658			207
Depreciation and amortization		824			678			2,374			1,983
Total operating expenses		104,003			81,453			306,108			238,450
Income from operations		10,482			9,444			33,496			27,790
Investment income		3			8			12			15
Interest expense		(62	)		(22	)		(106	)		(66	)
Income before income taxes		10,423			9,430			33,402			27,739
Income tax provision		3,961			3,364			12,693			10,504
Net income	$	6,462		$	6,066		$	20,709		$	17,235
Net income per share:
Basic	$	0.39		$	0.37		$	1.27		$	1.06
Diluted	$	0.38		$	0.37		$	1.23		$	1.04

The accompanying notes are an integral part of these consolidated financial statements.

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IPC The Hospitalist Company, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2011			2010
Operating activities
Net income	$	20,709		$	17,235
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,374			1,983
Stock-based compensation expense		3,473			2,310
Tax liability reduction for uncertain tax positions		0			(219	)
Net change in fair value of contingent consideration		658			207
Changes in assets and liabilities:
Accounts receivable		(8,736	)		(190	)
Prepaid expenses and other current assets		4,994			5,472
Accounts payable and accrued liabilities		5			(1	)
Accrued compensation		4,779			4,375
Medical malpractice and self-insurance reserves, net		2,777			1,406
Accrued professional liability settlement		0			(750	)
Net cash provided by operating activities		31,033			31,828
Investing activities
Acquisitions of physician practices		(19,387	)		(13,788	)
Purchase of property and equipment		(2,075	)		(1,827	)
Net cash used in investing activities		(21,462	)		(15,615	)
Financing activities
Net proceeds from issuance of common stock		2,352			1,133
Excess tax benefits from stock-based compensation		1,177			345
Net cash provided by financing activities		3,529			1,478
Net increase in cash and cash equivalents		13,100			17,691
Cash and cash equivalents, beginning of period		18,935			31,473
Cash and cash equivalents, end of period	$	32,035		$	49,164
Supplemental disclosure of cash flow information
Cash paid for:
Interest	$	107		$	65
Income taxes	$	11,843		$	9,113

The accompanying notes are an integral part of these consolidated financial statements.

5

IPC The Hospitalist Company, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

September 30, 2011

Note 1. Operations and Significant Accounting Policies

Business

IPC The Hospitalist Company, Inc. and its wholly-owned subsidiaries (the “Company,” “IPC,” “we,” “us,” and “our”) is a national physician group practice company that operates and manages full-time hospitalist practices. Hospitalists are acute-care physician specialists, who focus on a patient’s hospital care from time of admission to discharge and have no outpatient responsibilities. Hospitalists practice exclusively in hospitals or other inpatient facilities, including acute, sub-acute and long-term care settings. The physicians are primarily full-time employees of our subsidiaries or consolidated professional medical corporations (the Professional Medical Corporations), although part-time and temporary physicians are also employed or contracted on an as-needed basis. Also, unless otherwise expressly stated or the context otherwise requires, “our affiliated hospitalists” refer to physicians, nurse practitioners and physician assistants employed or contracted by either our wholly-owned subsidiaries or our Professional Medical Corporations. References to “practices” or “practice groups” refer to our Professional Medical Corporations and the wholly-owned subsidiaries of IPC that provide medical services, unless otherwise expressly stated or the context otherwise requires.

We prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) on the same basis as our audited annual financial statements. In our opinion, these financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the following disclosures, when read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2010, are adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 7, 2011.

Principles of Consolidation

Our consolidated financial statements include the accounts of IPC The Hospitalist Company, Inc. and its wholly owned subsidiaries and the Professional Medical Corporations managed under long-term management agreements. Some states have laws that prohibit business entities, such as IPC, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (collectively known as the corporate practice of medicine), or engaging in certain arrangements with physicians, such as fee-splitting. In states that have these restrictions, we operate by maintaining long-term management contracts with the Professional Medical Corporations, which are each owned and operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under the management agreements, we provide and perform all non-medical management and administrative services, including financial management, information systems, marketing, risk management and administrative support. The management agreements have an initial term of 20 years and are automatically renewable for successive 10-year periods unless terminated by either party for cause. The management agreements are not terminable by the Professional Medical Corporations, except in the case of gross negligence, fraud, or other illegal acts by us, or bankruptcy of IPC.

Through the management agreements and our relationship with the stockholders of the Professional Medical Corporations, we have exclusive authority over all non-medical decision making related to the ongoing business operations of the Professional Medical Corporations. Further, our rights under the management agreements are unilaterally salable or transferable. Based on the provisions of the agreements, we have determined that the Professional Medical Corporations are variable interest entities (VIE’s), and that we are the primary beneficiary because we have control over the operations of these VIE’s. Consequently, we consolidate the revenue and expenses of the Professional Medical Corporations from the date of execution of the management agreements. All intercompany balances and transactions have been eliminated in consolidation.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions of the fair value of certain reported amounts of assets, liabilities, revenues and expenses at the date and for the periods that the financial statements are prepared. Significant estimates include the estimated net realizable value of accounts receivable, medical malpractice insurance receivable and payable for known claims, liabilities for claims incurred but not reported (IBNR) related to medical malpractice, fair value of contingent consideration related to business combinations and the analysis of goodwill for impairment.

The process of estimating these assets and liabilities involves judgment decisions, which are subject to an inherent degree of uncertainty. Actual results could differ from those estimates. The results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2011.

Fair Value of Financial Instruments

Our consolidated balance sheet as of September 30, 2011 included the following financial instruments: cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities. We consider the carrying amounts of these financial instruments to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.

Accounts Receivable and Concentration of Credit Risk

For the nine months ended September 30, 2011 and 2010, total patient volume consisted of the following percentage from Medicare and Medicaid programs:

	Nine Months Ended September 30,
	2011	2010
Medicare and Medicaid patients	51%	51%

Our accounts receivable are stated at the amounts expected to be collected. Except with respect to the Medicare and Medicaid programs, concentrations of credit risk, which consist primarily of accounts receivable, is limited due to the large number of payors that compose our diverse payor mix and patient base. Accounts receivable from Medicare and Medicaid made up the following percentage of total net accounts receivable:

	September 30, 2011	December 31, 2010
Percentage of receivables from Medicare and Medicaid	37%	37%

Medical Malpractice Liability Insurance

We maintain medical malpractice insurance coverage that indemnifies us and our employed health care professionals on a claims-made basis. Our claims-made coverage covers those claims reported during the policy period on a first dollar coverage up to our policy limits on new claims reported during the policy period. In December 2010, we renewed our annual professional liability insurance policy for 2011 effective January 1, 2011 under the same terms as our 2010 policy. We expect to be able to continue to obtain coverage in future years; however, there can be no assurance that we will obtain substantially similar coverage as is provided under the 2011 policy at acceptable costs and on favorable terms upon expiration.

We record reserves for claims incurred but not reported (IBNR) on an undiscounted basis based upon actuarial loss projections using our historical loss experience. See our discussion under Recently Adopted Accounting Principles for a summary of our accrued medical malpractice reserves and related insurance receivables.

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Recently Adopted Accounting Principles

In August 2010, the Financial Accounting Standard Board (FASB) issued revised GAAP on the presentation of insurance claims and related insurance recoveries. The revised GAAP requires a healthcare entity to present medical malpractice claims and similar liabilities without consideration of insurance recoveries. Related insurance recoveries are to be presented as a receivable net of a valuation allowance for uncollectible amounts. On January 1, 2011, we adopted the revised GAAP to separately present reserves for known malpractice claims and receivables for the related insurance recoveries on an undiscounted basis based upon actuarial loss projections using our historical loss experience. We also elected to retroactively apply the revised GAAP as of December 31, 2010 for comparability. The retroactive application of this revised GAAP changed our consolidated balance sheet as of December 31, 2010, but had no impact on our 2010 consolidated statements of income and cash flows.

Total accrued medical malpractice reserves and related insurance receivables were as follows (in thousands):

	September 30, 2011								December 31, 2010
	Assets		Liabilities						Assets		Liabilities
	Insurance Receivable		Claims Reserve		IBNR Reserve		Total Liabilities		Insurance Receivable		Claims Reserve		IBNR Reserve		Total Liabilities
Current Portion	$	8,044	$	8,044		583		8,627	$	6,491	$	6,597		343		6,940
Long-term Portion		14,531		14,531		16,789		31,320		11,725		11,725		14,146		25,871
Total	$	22,575	$	22,575		17,372		39,947	$	18,216	$	18,322		14,489		32,811

New Accounting Principles

In September 2011, the FASB issued a GAAP update on goodwill to allow an entity the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the entity shall perform the quantitative two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This revised GAAP will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.

In July 2011, the FASB issued a GAAP update on revenue recognition for certain health care entities that recognize significant amounts of patient service revenue without assessing the patient’s ability to pay. This revised GAAP requires such health care entities to present the provision for bad debt related to patient service revenue as a deduction from patient service revenue (net of contractual allowance and discounts) on their statement of income. It also requires additional disclosures of patient service revenue as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. This revised GAAP will be effective for annual and interim periods beginning after December 15, 2011. We currently recognize patient service revenue net of estimated bad debt as required by this revised GAAP; therefore, we do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.

In May 2011, the FASB issued a GAAP update on fair value measurement, which eliminates differences between U.S. GAAP and International Financial Reporting Standards (IFRS), resulting in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. It also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This revised GAAP will be effective for annual and interim periods beginning after December 15, 2011. We do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

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Note 2. Acquisitions

In connection with the acquisition of hospitalist physician practices, we generally record goodwill and other identifiable intangible assets consisting of physician and hospital agreements. The results of operations of the acquired practices are included in the consolidated financial statements from the date of acquisition. In addition to the initial consideration paid at the close of these transactions, the asset purchase agreements generally provide for future consideration to be paid based upon the achievement of certain operating results of the acquired practices as of certain measurement dates. These additional payments are not contingent upon the future employment of the sellers. The estimated fair value of additional future consideration is recognized at the acquisition-date. Subsequent changes, if any, to the acquisition-date fair value are recognized as part of on-going operations.

During the nine months ended September 30, 2011, we completed the acquisition of assets of nine hospitalist physician practices. In addition to the initial consideration paid at the close of these transactions, the asset purchase agreements provide for additional consideration to be paid generally after the first year of operation, based upon the future operating results of the acquired practices, as defined in each purchase agreement.

The following table summarizes the total amounts recorded during the nine months ended September 30, 2011, related to the acquisition of hospitalist practices (in thousands):

Acquired assets – paid and accrued:
Goodwill	$	15,111
Other intangible assets		150
Fixed assets		3
Total acquired assets		15,264
Cash paid for acquisitions:
2011 transactions		(9,960	)
Contingent consideration		(9,171	)
Other – prior year transactions		(256	)
Total cash paid for acquisitions		(19,387	)
Decrease in payables for practice acquisitions		(4,123	)
Net change in fair value of contingent consideration		658
Net change in payables for practice acquisitions		(3,465	)
Payables for practice acquisitions, beginning of period		27,715
Payables for practice acquisitions, end of period	$	24,250

Note 3. Debt

On August 4, 2011, we entered into a new five-year secured revolving credit agreement (Credit Facility), which provides a revolving line of credit of $75.0 million and contains an “accordion” feature that allows an increase of $25.0 million to the Credit Facility with lender approval. This new Credit Facility replaced our prior $30.0 million credit agreement which was scheduled to expire in September 2011. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. As of September 30, 2011, we had a letter of credit of $0.1 million outstanding and $74.9 million available under the revolving line of credit.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.25%, or the lender’s prime rate plus 0% to 0.25%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.

The Credit Facility is guaranteed by our subsidiaries and affiliated professional medical corporations and limited liability companies, and is secured by substantially all of our and our guarantors’ tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders

9

following an event of default. As of September 30, 2011, we were in compliance with such financial covenants and restrictions.

Note 4. Income Taxes

Following are the income tax provisions and effective tax rates for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Income tax provision	$	3,961		$	3,364		$	12,693		$	10,504
Effective tax rate		38.0	%		35.7	%		38.0	%		37.9	%

The difference in the effective tax rate for three months ended September 30, 2011 as compared to three months ended September 30, 2010 was due primarily to a one-time reduction in our tax liability for uncertain tax positions resulting from the lapse of statute of limitations during the three months ended September 30, 2010. The effective tax rates differ from the statutory U.S. federal income tax rate of 35.0% due primarily to state income taxes.

Our accounting policy is to include interest and penalties related to income tax liabilities in income tax expense. As of September 30, 2011, we had accrued a total of $11,000 for estimated interest and penalties related to uncertain tax positions.

The tax years 2006 to 2010 remain open to examination by the major taxing jurisdictions to which we are subject. The statute of limitations for tax years 1997 to 2005 has expired, except that the tax years 1997 to 2002 are subject to adjustment of net operating losses by the Internal Revenue Service. We are subject to taxation in the United States and various state jurisdictions. A state tax examination has been initiated for one of our subsidiaries. The outcome of such examination cannot be predicted with certainty; however, we believe that the ultimate resolution will not have a material effect on our financial position, results of operations or cash flows.

We make our best estimate of the tax rate expected to be applicable for the full fiscal year. The rate so determined is used to compute our income taxes expense for an interim period.

Note 5. Stock-Based Compensation

At September 30, 2011, we had a stock-based employee compensation program, for which we had reserved a total of 3,406,779 common shares for issuance. In accordance with our Equity Participation Plan (Equity Plan), for each calendar year until 2013, the number of shares authorized for issuance under our Equity Plan will increase in an amount equal to 2.5% of the total number of shares of our common stock outstanding at the close of the first trading day of each year. Pursuant to our Equity Plan, the available shares of our common stock for issuance were increased by 407,921 on January 3, 2011. As of September 30, 2011, there were 238,480 shares of our common stock available for issuance under our Equity Plan.

The options under our Equity Plan generally vest over a four-year period from date of grant, and terminate on the 10th anniversary of the agreement date. Restricted stock awards generally vest over a four-year period from date of the award.

All option awards granted during the nine months ended September 30, 2011 were issued with exercise prices equal to the closing price of our common stock on the NASDAQ Global Select Market on the dates of the grant.

Stock-based compensation expense is recognized when the options and restricted stock awards are vested, and is included in total general and administrative expenses as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Stock-based compensation expense	$	1,222	$	803	$	3,473	$	2,310

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As of September 30, 2011, total unrecognized compensation costs related to non-vested stock-based compensation arrangements granted under our Equity Plan and the weighted-average period of years expected to recognize those costs are as follows (dollars in thousands).

	Total Unrecognized Compensation Cost		Weighted-average Remaining Contractual Term
			(Years)
Stock option	$	9,056		2.79
Restricted stock	$	741		3.27

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:

	Nine months ended September 30,
	2011			2010
Risk-free interest rate		2.55	%		1.24	%
Expected volatility		39.34	%		40.00	%
Expected option life (in years)		6.16			5.83
Expected dividend yield		0.00	%		0.00	%

The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues. The expected volatility is based on historical volatility levels of our public company peer group and the volatility of our stock price since our initial public offering in January 2008. The expected option life of each award granted was calculated using the “simplified method” in accordance with GAAP.

The grant date fair value of each restricted stock award is based on the closing stock price on the grant date of the award as reported by NASDAQ Global Select Market.

The following table summarizes the option activities in our Equity Plan during the nine months ended September 30, 2011.

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value		Weighted Average Fair Value
						(Years)		(in ’000)
Options outstanding as of December 31, 2010		1,309,525		$	18.92					$	8.10
Changes during period:
Granted		360,500			45.37						19.26
Exercised		(107,166	)		13.81						5.87
Cancelled/Forfeited		(4,027	)		35.99						14.47
Expired		(1,173	)		0.77						0.14
Options outstanding as of September 30, 2011		1,557,659		$	25.37		7.63	$	19,552	$	10.82
Options exercisable as of September 30, 2011		848,774		$	17.65		6.82	$	15,464	$	7.46

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The following table summarizes the restricted stock award activities in our Equity Plan during the nine months ended September 30, 2011.

	Shares			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value		Weighted Average Fair Value
				(Years)		(in ’000)
Restricted stock awards outstanding as of December 31, 2010		6,473						$	21.63
Changes during period:
Granted		20,812							45.91
Vested		(1,362	)						27.53
Forfeited		(427	)						40.99
Restricted stock awards outstanding as of September 30, 2011		25,496			2.79	$	910	$	40.81

Note 6. Earnings Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income for the period by the weighted average number of shares outstanding during the period plus the dilutive effect of our outstanding stock awards and shares issuable under our employee stock purchase plan using the treasury stock method.

The calculations of basic and diluted net income per share for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands, except for share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Basic:
Net income	$	6,462	$	6,066	$	20,709	$	17,235
Weighted average number of common shares outstanding		16,419,071		16,256,757		16,370,878		16,239,672
Basic net income per share	$	0.39	$	0.37	$	1.27	$	1.06
Diluted:
Net income	$	6,462	$	6,066	$	20,709	$	17,235
Weighted average number of common shares outstanding		16,419,071		16,256,757		16,370,878		16,239,672
Weighted average number of dilutive common shares equivalents		423,176		284,275		433,426		331,196
Common shares and common share equivalents		16,842,247		16,541,032		16,804,304		16,570,868
Diluted net income per share	$	0.38	$	0.37	$	1.23	$	1.04

Outstanding stock options with an exercise price above market are excluded from our diluted computation as their effect would be anti-dilutive. At September 30, 2011, there were approximately 236,400 outstanding stock options with an exercise price above the average market price for the nine months ended September 30, 2011.

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Note 7. Commitments and Contingencies

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject to other lawsuits which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney’s Office for the Northern District of Illinois. The CID requested information concerning claims that we have submitted to Medicare and Medicaid. The CID covered the period from January 1, 2003, through June 4, 2010, and requested production of a range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations, billings and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training, and compliance programs and controls. The Company has produced responsive documents and will discuss with representatives of the government additional future productions to be made if requested. We have been informed by the DOJ that a qui tam whistleblower complaint related to this investigation naming the Company has been filed under court seal in the U.S. District Court for the Northern District of Illinois (Chicago). We also have been informed that several state attorneys general are examining our Medicaid claims in coordination with the DOJ. It is not possible to predict whether or when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

Note 8. Fair Value Measurement

Some of our assets and liabilities are measured and recorded at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The established fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). This hierarchy is used to measure fair value as follows:

• Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities.

• Level 2 inputs include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for the asset or liability.

• Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity.

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The following table presents our liabilities measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

	Quoted Price In Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance
Accrued contingent consideration for practice acquisitions (included in payables for practice acquisitions)	$	—	$	—	$	24,250	$	24,250

The following table presents a reconciliation for our liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
Accrued contingent consideration for practice acquisitions
Beginning balance	$	25,731		$	27,459
Addition through acquisition transactions		3,415			5,304
Change in fair value realized		178			658
Payments		(5,074	)		(9,171	)
Ending balance	$	24,250		$	24,250

Our payables for practice acquisitions includes accrued contingent consideration, the fair value of which is determined using widely accepted valuation techniques, which include the utilization of the income approach valuation method for estimating future consideration to be paid based on projected earnings of the acquired practices as of certain measurement dates. The earnings projections and the related fair value of our accrued contingent consideration for practice acquisitions are reassessed on a quarterly basis.

Note 9. Subsequent Events

Subsequent to September 30, 2011, we acquired the assets of three hospitalist physician practices.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (SEC) on March 7, 2011.

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of IPC that are based on management’s current expectations, estimates, projections, and assumptions about our business. Words such as “may,” “will,” “could,” “should,” “target,” “potential,” “project,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in our most recent Annual Report on Form 10-K, including the section entitled “Risk Factors,” as well as those discussed from time to time in the Company’s other SEC filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Quarterly Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Overview and Recent Developments

We are a leading provider of hospitalist services in the United States. Hospitalist medicine is organized around inpatient care, primarily delivered in acute hospitals, but also in post-acute facilities, and is focused on providing, managing and coordinating the care of patients in facility based care settings. We believe we are the largest dedicated hospitalist company in the United States based on revenues, patient encounters and number of affiliated hospitalists. Our early entry into the emerging hospitalist industry has permitted us to establish a reputation and leadership position that we believe is closely identified with hospitalist medicine.

Acquisitions

During the nine months ended September 30, 2011, we acquired the assets of nine hospitalist physician practices for a total estimated purchase price of $15,264,000. In connection with these acquisitions, we recorded fixed assets of $3,000, goodwill of $15,111,000 and other identifiable intangible assets of $150,000 consisting of physician, payor and hospital agreements. Total transaction costs of $274,000 for our acquisition activities during the nine months ended September 30, 2011 were expensed as incurred.

In connection with these acquisitions, we recorded liabilities of $5.3 million representing the fair value of future contingent considerations to be paid based upon the estimated achievement of certain operating results of the acquired practices as of certain measurement dates. The fair value of such contingent considerations is re-evaluated on a quarterly basis based on changes in our estimate of the operating results of future payments. The changes, if any, in fair value are recognized in our results of operations.

Subsequent to September 30, 2011, we acquired the assets of three hospitalist physician practices.

Rate Changes by Government Sponsored Programs

The Medicare program reimburses for our services based upon the rates in the Medicare Physician Fee Schedule, and each year the Medicare program updates the Physician Fee Schedule reimbursement rates based on a formula established by Congress in the Balanced Budget Act of 1997. Many private payors use the Medicare Physician fee schedule to determine their own Physician reimbursement rates.

The Medicare law requires the Centers for Medicare and Medicaid Services (CMS) to adjust the Physician Fee Schedule payment rates annually based on an update formula which includes application of the Sustainable Growth Rate (SGR) that was adopted in the Balanced Budget Act of 1997. This formula has yielded negative updates every year beginning in 2002, and numerous subsequent administrative and legislative actions since then have either delayed, modified or overrode the SGR formula to prevent the reimbursement reductions. In December 2010, Congress passed the Medicare and Medicaid Extenders Act of 2010, which halted a 25 percent reduction in Medicare physician payments otherwise mandated by the SGR as of January 1, 2011. This legislation extended the stay of the SGR reductions for a full year, through the end of 2011. While Congress has repeatedly intervened to mitigate the negative reimbursement impact associated with the SGR formula, there is no guarantee that Congress will continue to do so in the future. Moreover, the existing methodology may result in significant yearly fluctuations in the Physician Fee Schedule amounts, which may be unrelated to changes in the actual costs of providing physician services. Unless there is a change in the SGR methodology, the uncertainty regarding reimbursement rates and fluctuation will continue to exist.

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Another provision of the Medicare and Medicaid Extenders Act of 2010 extends through the end of 2011 the “floor” of 1.0 for the “work” component of the Geographic Practice Cost Indices (GPCI). The GPCI adjusts Medicare payments to physicians to reflect the geographic variation in the cost of delivering physician services, by comparing those costs to the national average. In the absence of the floor specified by the legislation, payments would be decreased for any geographic area with an index of less than 1.0. Although Congress has extended the work GPCI floor several times, and has done so for the calendar year 2011, there is no guarantee that Congress will take legislative action to halt future expirations of the floor, which could result in a decrease in payments we receive for physician services.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively “The Healthcare Reform Act”) were enacted. The Healthcare Reform Act includes a number of provisions that may affect our Company, although the impact of many of the changes will be unknown until they are implemented, which in some cases will not occur for several years. The impact of some of these provisions may be positive, such as the expansion in the number of individuals with health insurance, the 10% Medicare bonus payment for certain outpatient and nursing home visits from 2011 through 2015 for primary care practitioners for whom primary care services represented a minimum of 60% of Medicare allowed charges in a prior period, and the increase in Medicaid rates in 2013 and 2014 for primary care services. The impact of other provisions is unknown at this time, such as the establishment of an Independent Medicare Advisory Board that could recommend changes in payment for physicians under certain circumstances not earlier than January 15, 2014, which the Secretary of Health and Human Services generally would be required to implement unless Congress enacts superseding legislation. Fraud and abuse penalty increases and the expansion in the scope of the reach of the Federal Civil False Claims Act and government enforcement tools may adversely impact entities in the healthcare industry, including our Company.

There are a number of initiatives, both judicial and legislative, that may result in another partial or complete repeal of The Healthcare Reform Act. The constitutionality of The Healthcare Reform Act is currently being challenged through the courts. Several federal district and appellate courts have considered, along with other issues, the question of whether The Healthcare Reform Act’s requirement that individuals purchase health insurance violates the commerce clause of the Constitution. Some of these courts have determined it is constitutional while others have ruled it unconstitutional, and the Supreme Court is widely expected to hear at least one of the cases after the Obama Administration petitioned the Supreme Court to consider the issue. The Supreme Court could strike down the individual mandate only, or it could strike down the entire law, including the payment increases and eligibility expansion. Congress has also taken up several measures to repeal all or parts of The Healthcare Reform Act. Although the key parts of The Healthcare Reform Act have not been repealed as of yet, the impact of the Supreme Court’s judgment on The Healthcare Reform Act or legislative repeal of key provisions on our Company cannot be determined at this time.

On August 2, 2011, the Budget Control Act of 2011 (the “Budget Control Act”) was enacted into law which raised the debt ceiling and put into effect a series of actions to reduce the federal deficit over ten years. The Budget Control Act also establishes a bipartisan joint select committee of Congress that is responsible for developing recommendations to reduce future federal budget deficits by more than an additional $1.2 trillion over 10 years. If the joint select committee’s bill is not enacted by January 15, 2012, across-the-board cuts to mandatory and discretionary federal spending could be automatically implemented, which could result in reductions of payments to Medicare providers of up to 2% beginning in 2013. At this time it is unclear how this automatic reduction may be applied to various Medicare healthcare programs, including physician reimbursement. If the joint select committee’s bill is enacted by January 15, 2012, it could affect various Medicare healthcare programs, including physician reimbursement. Therefore it is not possible at this time to estimate what impact, if any, the Budget Control Act will have on our business or results of operations. However, under our provider compensation plan, any decrease in reimbursement rates also reduces our physician incentive payments such that, for example, a 2% net reduction in Medicare reimbursement rates for the codes applicable to the services performed by our affiliated hospitalists could reduce our net income by approximately 0.2%.

Seasonality and Quarterly Fluctuations

We have historically experienced and expect to continue to experience quarterly fluctuations in net revenue and income from operations. Absent the impact and timing of acquisitions, our net revenue has historically been higher in the first and fourth quarters of the year primarily due to the following factors:

• the number of physicians we have on staff during the quarter, which may fluctuate based upon the timing of hires due to the end of the academic year for graduating resident physicians, the schedule of the Internal Medicine Board exams and terminations in our existing practices; and

• fluctuations in patient encounters, which are impacted by hospital census, which can be volatile, and physician productivity and often reflect seasonality due to the higher occurrence of illnesses such as flu and pneumonia in patient populations in the first quarter.

We have significant fixed operating costs, including physician practice salaries and benefits and, as a result, are highly dependent on patient encounters and the productivity of our affiliated hospitalists to sustain profitability. Additionally, quarterly results may be affected by the timing of practice acquisitions and the hiring and termination of our affiliated hospitalists.

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Results of Operations and Operating Data

The following table sets forth operating data and selected consolidated statements of income information stated as a percentage of net revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Operating data – patient encounters		1,193,000			957,000			3,538,000			2,804,000
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Cost of services – physician practice salaries, benefits and other		74.2	%		72.7	%		73.3	%		72.4	%
General and administrative		15.8	%		16.1	%		16.0	%		16.3	%
Net change in fair value of contingent consideration		0.2	%		0.1	%		0.2	%		0.1	%
Depreciation and amortization		0.6	%		0.7	%		0.6	%		0.8	%
Total operating expenses		90.8	%		89.6	%		90.1	%		89.6	%
Income from operations		9.2	%		10.4	%		9.9	%		10.4	%
Investment income		0.0	%		0.0	%		0.0	%		0.0	%
Interest expense		(0.1	)%		0.0	%		(0.1	)%		0.0	%
Income before income taxes		9.1	%		10.4	%		9.8	%		10.4	%
Income tax provision		3.5	%		3.7	%		3.7	%		3.9	%
Net income		5.6	%		6.7	%		6.1	%		6.5	%

Three months ended September 30, 2011 compared to three months ended September 30, 2010

Our patient encounters for the three months ended September 30, 2011 increased by 236,000 encounters or 24.7% to 1,193,000, compared to 957,000 for the same period in the prior year. Net revenue for the three months ended September 30, 2011 was $114.5 million, an increase of $23.6 million, or 26.0%, from $90.9 million for the three months ended September 30, 2010. Of this $23.6 million increase, 66% was attributable to same-market area growth and 34% was attributable to revenue generated from seven new markets. Of these new markets, three were entered through acquisitions in 2010, two were entered through acquisitions in 2011 and two were from new hospital contracts established in 2011. Same-market revenue increased 17.1%, same-market encounters increased 16.4% and patient revenue per encounter decreased 0.6%. The remaining increase in same-market revenue was attributable to an increase in hospital contract and other revenue. Same-market areas are those geographic areas in which we have had operations for the entire current period and the entire comparable prior period. Because in-market area acquisitions are often small practice groups which become subsumed within our existing practice groups and are managed by our existing regional management staff, we consider these as part of our same-market area growth.

Physician practice salaries, benefits and other expenses for the three months ended September 30, 2011 were $84.9 million or 74.2% of net revenue compared to $66.1 million or 72.7% of net revenue for the three months ended September 30, 2010. These costs increased by $18.8 million or 28.6%. The increase in practice costs is largely related to the increase in the number of hospitalists added through hiring and acquisitions during the period and to continued investment in physician leadership initiatives. Same-market area physician costs increased a total of $12.7 million, of which $14.1 million was primarily the result of increased costs related to our new hires or acquired physician practices offset by a decrease in existing physician costs of $1.4 million. In addition, $6.1 million of the $18.8 million overall cost increase is attributable to physician costs associated with our seven new markets.

As a percentage of revenue, physician costs increased by 150 basis points quarter over quarter. We had a net increase of 78 new providers during the quarter either through hiring or acquisitions. This large increase in the number of physicians resulted in lower productivity and higher onboarding costs such as hiring bonuses and relocation expenses. In addition, several of the larger practices continued the use of temporary staffing such as locums and moonlighters as was the case in the second quarter of 2011. Increased productivity from our new providers as they gain experience and a reduction in the use of temporary staff should result in an increase in practice margins during the fourth quarter.

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General and administrative expenses include all salaries, benefits and operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collections functions, our regional and market-area administrative offices and our corporate management and overhead. General and administrative expenses increased $3.5 million, or 23.8%, to $18.1 million, or 15.8% of net revenue, for the three months ended September 30, 2011, as compared to $14.6 million, or 16.1% of net revenue, for the three months ended September 30, 2010. The increase in expense is primarily the result of increased costs to support the continuing growth of our operations, including new regional office costs and increases in corporate development and other expenses to support our acquisitions. General and administrative expenses decreased as a percentage of net revenue as we continue to leverage these costs over a larger revenue base. Excluding stock based compensation, which increased primarily as a result of the increase in our stock price at the date of various grants, general and administrative expenses decreased by 50 basis points to 14.7% of revenue, compared to 15.2% of revenue for the same period of 2010.

Income from operations increased $1.1 million, or 11.0%, to $10.5 million from $9.4 million for the same period in the prior year. Our operating margin was 9.2% for the three months ended September 30, 2011, as compared to 10.4% for the three months ended September 30, 2010. The decrease in the operating margin was largely the result of the increase in physician costs as a percentage of revenue, partially offset by the decrease in general and administrative expenses as a percentage of revenue.

Our effective tax rate for the three months ended September 30, 2011 was 38.0% compared to 35.7% for the three months ended September 30, 2010. Our prior year effective tax rate for the three-month period was lower due primarily to a one-time reduction in our tax liability for uncertain tax positions resulting from the lapse of statute of limitations. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to state income taxes.

Net income for the three months ended September 30, 2011 increased to $6.5 million from $6.1 million for the three months ended September 30, 2010, and our net income margin was 5.6%, as compared to 6.7% for the same period in the prior year.

Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

Our patient encounters for the nine months ended September 30, 2011 increased by 734,000 encounters or 26.2% to 3,538,000, compared to 2,804,000 for the same period in the prior year. Net revenue for the nine months ended September 30, 2011 was $339.6 million, an increase of $73.4 million, or 27.6%, from $266.2 million for the nine months ended September 30, 2010. Of this $73.4 million increase, 71% was attributable to same-market area growth and 29% was attributable to revenue generated from seven new markets. Of these new markets, three were entered through acquisitions in 2010, two were entered through acquisitions in 2011, and two were from new hospital contracts established in 2011. Same-market revenue increased 19.7%, same-market encounters increased 18.7% and patient revenue per encounter increased 0.4%. The remaining increase in same-market revenue was attributable to an increase in hospital contract and other revenue.

Physician practice salaries, benefits and other expenses for the nine months ended September 30, 2011 were $248.8 million or 73.3% of net revenue compared to $192.8 million or 72.4% of net revenue for the nine months ended September 30, 2010. These costs increased by $56.0 million or 29.1%. The increase in practice costs is largely related to the increase in the number of hospitalists added through hiring and acquisitions during the period and to continued investment in physician leadership initiatives. Same-market area physician costs increased a total of $40.4 million, of which $39.8 million was primarily the result of increased costs related to our new hires or acquired physician practices, and $0.6 million was due to increase in existing physician costs. In addition, $15.6 million of the $56.0 million overall cost increase is attributable to physician costs associated with our seven new markets.

General and administrative expenses increased $10.8 million, or 24.8%, to $54.3 million, or 16.0% of net revenue, for the nine months ended September 30, 2011, as compared to $43.5 million, or 16.3% of net revenue, for the nine months ended September 30, 2010. The increase in expense is primarily the result of increased costs to support the continuing growth of our operations, including new regional office costs and increases in corporate development and other expenses to support our acquisitions. General and administrative expenses decreased as a percentage of net revenue as we continue to leverage these costs over a larger revenue base. Excluding stock based compensation, which increased primarily as a result of the increase in our stock price at the date of various grants, general and administrative expenses decreased by 50 basis points to 15.0% of revenue, compared to 15.5% of revenue for the same period of 2010.

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Income from operations increased $5.7 million, or 20.5%, to $33.5 million from $27.8 million for the same period in the prior year. Our operating margin was 9.9% for the nine months ended September 30, 2011, as compared to 10.4% for the nine months ended September 30, 2010. The decrease in the operating margin was largely the result of the increase in physician costs as a percentage of revenue, partially offset by the decrease in general and administrative expenses as a percentage of revenue.

Our effective tax rate for the nine months ended September 30, 2011 was 38.0% compared to 37.9% for the nine months ended September 30, 2010. The effective tax rate differs from the statutory U.S. federal rate of 35.0% due primarily to state income taxes.

Net income for the nine months ended September 30, 2011 increased to $20.7 million from $17.2 million for the nine months ended September 30, 2010, and our net income margin was 6.1%, as compared to 6.5% for the same period in the prior year.

Liquidity and Capital Resources

As of September 30, 2011, we had no debt outstanding, and approximately $106.9 million in liquidity, composed of $32.0 million in cash and cash equivalents, and an available line of credit of $74.9 million.

Net cash provided by operating activities for the nine months ended September 30, 2011 was $31.0 million compared to $31.8 million for the same period of 2010. The primary changes in working capital during the nine months ended September 30, 2011 was composed of (i) an increase in accounts receivable of $8.7 million, (ii) a decrease of prepaid expenses and other current assets of $5.0 million, (iii) an increase in accrued compensation of $4.8 million primarily related to timing of payrolls and physician bonus payments, and (iv) a net increase in medical malpractice and self-insurance reserves of $2.8 million.

Although our accounts receivable increased by $8.7 million since December 31, 2010, our days sales outstanding (DSO), which we use to measure the effectiveness of our collections, decreased to 49 DSO as of September 30, 2011, compared to 51 DSO as of December 31, 2010. We calculate our DSO using a three-month rolling average of net revenues.

Net cash used in investing activities was $21.5 million for the nine months ended September 30, 2011, compared to $15.6 million for the same period in 2010. Cash of $19.4 million was used in 2011 for physician practice acquisitions and earn-out payments on prior acquisitions compared to $13.8 million in the same period of the prior year. The remainder of cash used in investing activities was for purchases of computer hardware and software, and office furnishings.

Credit Facility and Liquidity

On August 4, 2011, we entered into a new five-year secured revolving credit agreement (Credit Facility), which provides a revolving line of credit of $75.0 million and contains an “accordion” feature that allows an increase of $25.0 million to the Credit Facility with lender approval. This new Credit Facility replaced our prior $30.0 million credit agreement which was scheduled to expire in September 2011. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. As of September 30, 2011, we had a letter of credit of $0.1 million outstanding and $74.9 million available under the revolving line of credit.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.25%, or the lender’s prime rate plus 0% to 0.25%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.

The Credit Facility is guaranteed by our subsidiaries and affiliated professional medical corporations and limited liability companies, and is secured by substantially all of our and our guarantors’ tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of September 30, 2011, we were in compliance with such financial covenants and restrictions.

We anticipate that funds generated from operations, together with our current cash on hand and funds available under our revolving credit agreement will be sufficient to finance our working capital requirements and fund anticipated acquisitions, contingent acquisition consideration and capital expenditures.

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Off Balance Sheet Arrangements

As of September 30, 2011, we had no off-balance sheet arrangements.

Recently Adopted and New Accounting Principles

See Note 1 to the Consolidated Financial Statements for information regarding recently adopted and new accounting principles.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no outstanding borrowings under our Credit Facility at September 30, 2011.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities with shorter maturities may produce less income if interest rates fall. As of September 30, 2011, all of our short-term investments were invested in money market funds with less than 90-day maturities and are classified as cash equivalents.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated physicians. We may also become subject to other lawsuits, which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney’s Office for the Northern District of Illinois. The CID requested information concerning claims that we have submitted to Medicare and Medicaid. The CID covered the period from January 1, 2003, through June 4, 2010, and requested production of a range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations, billings and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training, and compliance programs and controls. The Company has produced responsive documents and will discuss with representatives of the government additional future productions to be made if requested. We have been informed by the DOJ that a qui tam whistleblower complaint related to this investigation naming the Company has been filed under court seal in the U.S. District Court for the Northern District of Illinois (Chicago). We also have been informed that several state attorneys general are examining our Medicaid claims in coordination with the DOJ. It is not possible to predict whether or when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

ITEMS 1A, 2, 3, 4 AND 5 ARE NOT APPLICABLE

ITEM 6. EXHIBITS

(a) Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 23 of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 27thday of October, 2011.

IPC THE HOSPITALIST COMPANY, INC.
By:	/s/    ADAM D. SINGER, M.D.
	Adam D. Singer, M.D. Chief Executive Officer
By:	/s/    DEVRA G. SHAPIRO
	Devra G. Shapiro Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description of Document
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes Oxley Act.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes Oxley Act.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

23

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)

OR RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Adam D. Singer, M.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of IPC The Hospitalist Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 27, 2011

/s/ ADAM D. SINGER, M.D.

Adam D. Singer, M.D.

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)

OR RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Devra G. Shapiro, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IPC The Hospitalist Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 27, 2011

/s/ DEVRA G. SHAPIRO

Devra G. Shapiro

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of IPC The Hospitalist Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ADAM D. SINGER, M.D.

Adam D. Singer, M.D.

Chief Executive Officer

Date: October 27, 2011

EX-32.2

Exhibit 32.2

CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of IPC The Hospitalist Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DEVRA G. SHAPIRO

Devra G. Shapiro

Chief Financial Officer

Date: October 27, 2011

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	15,000,000	15,000,000
Preferred stock, shares issued	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	16,443,255	16,287,377
Common stock, shares outstanding	16,443,255	16,287,377

XML

Consolidated Statements Of Income (USD $) In Thousands, except Per Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Consolidated Statements Of Income [Abstract]
Net revenue	$ 114,485	$ 90,897	$ 339,604	$ 266,240
Operating expenses:
Cost of services - physician practice salaries, benefits and other	84,920	66,051	248,801	192,763
General and administrative	18,081	14,609	54,275	43,497
Net change in fair value of contingent consideration	178	115	658	207
Depreciation and amortization	824	678	2,374	1,983
Total operating expenses	104,003	81,453	306,108	238,450
Income from operations	10,482	9,444	33,496	27,790
Investment income	3	8	12	15
Interest expense	(62)	(22)	(106)	(66)
Income before income taxes	10,423	9,430	33,402	27,739
Income tax provision	3,961	3,364	12,693	10,504
Net income	$ 6,462	$ 6,066	$ 20,709	$ 17,235
Net income per share:
Basic	$ 0.39	$ 0.37	$ 1.27	$ 1.06
Diluted	$ 0.38	$ 0.37	$ 1.23	$ 1.04

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Oct. 19, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Entity Registrant Name	IPC The Hospitalist Company, Inc.
Entity Central Index Key	0001410471
Entity Filer Category	Accelerated Filer
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		16,444,409
Trading Symbol	ipcm

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Commitments And Contingencies

9 Months Ended

Sep. 30, 2011

Commitments And Contingencies [Abstract]

Commitments And Contingencies

Note 7. Commitments and Contingencies

Legal

In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated hospitalists. We may also become subject to other lawsuits which could involve significant claims and/or significant defense costs.

We believe, based upon our review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, or cash flows in a future period.

Government Inquiry

On June 7, 2010, we received a civil investigative demand (CID) issued by the Department of Justice (DOJ), U.S. Attorney's Office for the Northern District of Illinois. The CID requested information concerning claims that we have submitted to Medicare and Medicaid. The CID covered the period from January 1, 2003, through June 4, 2010, and requested production of a range of documents relating to our Medicare and Medicaid participation, physician arrangements, operations, billings and compliance programs. We believe we have a strong compliance focus, and that we operate with appropriate billing policies, procedures, provider training, and compliance programs and controls. The Company has produced responsive documents and will discuss with representatives of the government additional future productions to be made if requested. We have been informed by the DOJ that a qui tam whistleblower complaint related to this investigation naming the Company has been filed under court seal in the U.S. District Court for the Northern District of Illinois (Chicago). We also have been informed that several state attorneys general are examining our Medicaid claims in coordination with the DOJ. It is not possible to predict whether or when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

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Debt

9 Months Ended

Sep. 30, 2011

Debt [Abstract]

Debt

Note 3. Debt

On August 4, 2011, we entered into a new five-year secured revolving credit agreement (Credit Facility), which provides a revolving line of credit of $75.0 million and contains an "accordion" feature that allows an increase of $25.0 million to the Credit Facility with lender approval. This new Credit Facility replaced our prior $30.0 million credit agreement which was scheduled to expire in September 2011. The Credit Facility has a maturity date of August 4, 2016 and is available for working capital, practice acquisitions, capital expenditures and general business expenses. As of September 30, 2011, we had a letter of credit of $0.1 million outstanding and $74.9 million available under the revolving line of credit.

The revolving line of credit is limited by a formula based on a certain multiple times the trailing twelve months of earnings before interest, taxes, depreciation, amortization and certain non-cash items. Interest rate options for each borrowing under the Credit Facility, to be selected by us at the time of each borrowing, include either LIBOR plus 0.75% to 1.25%, or the lender's prime rate plus 0% to 0.25%, both based on a leverage ratio. We pay an unused commitment fee equal to 0.25% per annum on the difference between the revolving line capacity and the average balance outstanding during the year. Outstanding amounts advanced to us under the revolving line of credit are repayable on or before the maturity date.

The Credit Facility is guaranteed by our subsidiaries and affiliated professional medical corporations and limited liability companies, and is secured by substantially all of our and our guarantors' tangible and intangible assets. The Credit Facility includes various customary financial covenants and restrictions, as well as customary remedies for our lenders following an event of default. As of September 30, 2011, we were in compliance with such financial covenants and restrictions.

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Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events

Note 9. Subsequent Events

Subsequent to September 30, 2011, we acquired the assets of three hospitalist physician practices.

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Fair Value Measurement

9 Months Ended

Sep. 30, 2011

Fair Value Measurement [Abstract]

Fair Value Measurement

Note 8. Fair Value Measurement

Some of our assets and liabilities are measured and recorded at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The established fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity's own assumptions about market participant assumptions (Level 3). This hierarchy is used to measure fair value as follows:

• Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities.

• Level 2 inputs include quoted prices for similar assets and liabilities in active markets; quoted prices in markets that are not active; and other inputs that are observable or can be corroborated by observable market data for the asset or liability.

• Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity.

The following table presents our liabilities measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

	Quoted Price In Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance
Accrued contingent consideration for practice acquisitions (included in payables for practice acquisitions)	$	—	$	—	$	24,250	$	24,250

The following table presents a reconciliation for our liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
Accrued contingent consideration for practice acquisitions
Beginning balance	$	25,731		$	27,459
Addition through acquisition transactions		3,415			5,304
Change in fair value realized		178			658
Payments		(5,074	)		(9,171	)
Ending balance	$	24,250		$	24,250

Our payables for practice acquisitions includes accrued contingent consideration, the fair value of which is determined using widely accepted valuation techniques, which include the utilization of the income approach valuation method for estimating future consideration to be paid based on projected earnings of the acquired practices as of certain measurement dates. The earnings projections and the related fair value of our accrued contingent consideration for practice acquisitions are reassessed on a quarterly basis.

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Operations And Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Operations And Significant Accounting Policies [Abstract]

Operations And Significant Accounting Policies

Note 1. Operations and Significant Accounting Policies

Business

IPC The Hospitalist Company, Inc. and its wholly-owned subsidiaries (the "Company," "IPC," "we," "us," and "our") is a national physician group practice company that operates and manages full-time hospitalist practices. Hospitalists are acute-care physician specialists, who focus on a patient's hospital care from time of admission to discharge and have no outpatient responsibilities. Hospitalists practice exclusively in hospitals or other inpatient facilities, including acute, sub-acute and long-term care settings. The physicians are primarily full-time employees of our subsidiaries or consolidated professional medical corporations (the Professional Medical Corporations), although part-time and temporary physicians are also employed or contracted on an as-needed basis. Also, unless otherwise expressly stated or the context otherwise requires, "our affiliated hospitalists" refer to physicians, nurse practitioners and physician assistants employed or contracted by either our wholly-owned subsidiaries or our Professional Medical Corporations. References to "practices" or "practice groups" refer to our Professional Medical Corporations and the wholly-owned subsidiaries of IPC that provide medical services, unless otherwise expressly stated or the context otherwise requires.

We prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) on the same basis as our audited annual financial statements. In our opinion, these financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the following disclosures, when read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2010, are adequate to make the information presented not misleading. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 7, 2011.

Principles of Consolidation

Our consolidated financial statements include the accounts of IPC The Hospitalist Company, Inc. and its wholly owned subsidiaries and the Professional Medical Corporations managed under long-term management agreements. Some states have laws that prohibit business entities, such as IPC, from practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians (collectively known as the corporate practice of medicine), or engaging in certain arrangements with physicians, such as fee-splitting. In states that have these restrictions, we operate by maintaining long-term management contracts with the Professional Medical Corporations, which are each owned and operated by physicians, and which employ or contract with additional physicians to provide hospitalist services. Under the management agreements, we provide and perform all non-medical management and administrative services, including financial management, information systems, marketing, risk management and administrative support. The management agreements have an initial term of 20 years and are automatically renewable for successive 10-year periods unless terminated by either party for cause. The management agreements are not terminable by the Professional Medical Corporations, except in the case of gross negligence, fraud, or other illegal acts by us, or bankruptcy of IPC.

Through the management agreements and our relationship with the stockholders of the Professional Medical Corporations, we have exclusive authority over all non-medical decision making related to the ongoing business operations of the Professional Medical Corporations. Further, our rights under the management agreements are unilaterally salable or transferable. Based on the provisions of the agreements, we have determined that the Professional Medical Corporations are variable interest entities (VIE's), and that we are the primary beneficiary because we have control over the operations of these VIE's. Consequently, we consolidate the revenue and expenses of the Professional Medical Corporations from the date of execution of the management agreements. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions of the fair value of certain reported amounts of assets, liabilities, revenues and expenses at the date and for the periods that the financial statements are prepared. Significant estimates include the estimated net realizable value of accounts receivable, medical malpractice insurance receivable and payable for known claims, liabilities for claims incurred but not reported (IBNR) related to medical malpractice, fair value of contingent consideration related to business combinations and the analysis of goodwill for impairment.

The process of estimating these assets and liabilities involves judgment decisions, which are subject to an inherent degree of uncertainty. Actual results could differ from those estimates. The results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2011.

Fair Value of Financial Instruments

Our consolidated balance sheet as of September 30, 2011 included the following financial instruments: cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities. We consider the carrying amounts of these financial instruments to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.

Accounts Receivable and Concentration of Credit Risk

For the nine months ended September 30, 2011 and 2010, total patient volume consisted of the following percentage from Medicare and Medicaid programs:

	Nine Months Ended September 30,
	2011	2010
Medicare and Medicaid patients	51%	51%

Our accounts receivable are stated at the amounts expected to be collected. Except with respect to the Medicare and Medicaid programs, concentrations of credit risk, which consist primarily of accounts receivable, is limited due to the large number of payors that compose our diverse payor mix and patient base. Accounts receivable from Medicare and Medicaid made up the following percentage of total net accounts receivable:

	September 30, 2011	December 31, 2010
Percentage of receivables from Medicare and Medicaid	37%	37%

Medical Malpractice Liability Insurance

We maintain medical malpractice insurance coverage that indemnifies us and our employed health care professionals on a claims-made basis. Our claims-made coverage covers those claims reported during the policy period on a first dollar coverage up to our policy limits on new claims reported during the policy period. In December 2010, we renewed our annual professional liability insurance policy for 2011 effective January 1, 2011 under the same terms as our 2010 policy. We expect to be able to continue to obtain coverage in future years; however, there can be no assurance that we will obtain substantially similar coverage as is provided under the 2011 policy at acceptable costs and on favorable terms upon expiration.

We record reserves for claims incurred but not reported (IBNR) on an undiscounted basis based upon actuarial loss projections using our historical loss experience. See our discussion under Recently Adopted Accounting Principles for a summary of our accrued medical malpractice reserves and related insurance receivables.

Recently Adopted Accounting Principles

In August 2010, the Financial Accounting Standard Board (FASB) issued revised GAAP on the presentation of insurance claims and related insurance recoveries. The revised GAAP requires a healthcare entity to present medical malpractice claims and similar liabilities without consideration of insurance recoveries. Related insurance recoveries are to be presented as a receivable net of a valuation allowance for uncollectible amounts. On January 1, 2011, we adopted the revised GAAP to separately present reserves for known malpractice claims and receivables for the related insurance recoveries on an undiscounted basis based upon actuarial loss projections using our historical loss experience. We also elected to retroactively apply the revised GAAP as of December 31, 2010 for comparability. The retroactive application of this revised GAAP changed our consolidated balance sheet as of December 31, 2010, but had no impact on our 2010 consolidated statements of income and cash flows.

Total accrued medical malpractice reserves and related insurance receivables were as follows (in thousands):

	September 30, 2011								December 31, 2010
	Assets		Liabilities						Assets		Liabilities
	Insurance Receivable		Claims Reserve		IBNR Reserve		Total Liabilities		Insurance Receivable		Claims Reserve		IBNR Reserve		Total Liabilities
Current Portion	$	8,044	$	8,044		583		8,627	$	6,491	$	6,597		343		6,940
Long-term Portion		14,531		14,531		16,789		31,320		11,725		11,725		14,146		25,871
Total	$	22,575	$	22,575		17,372		39,947	$	18,216	$	18,322		14,489		32,811

New Accounting Principles

In September 2011, the FASB issued a GAAP update on goodwill to allow an entity the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the qualitative assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the entity shall perform the quantitative two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This revised GAAP will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.

In July 2011, the FASB issued a GAAP update on revenue recognition for certain health care entities that recognize significant amounts of patient service revenue without assessing the patient's ability to pay. This revised GAAP requires such health care entities to present the provision for bad debt related to patient service revenue as a deduction from patient service revenue (net of contractual allowance and discounts) on their statement of income. It also requires additional disclosures of patient service revenue as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. This revised GAAP will be effective for annual and interim periods beginning after December 15, 2011. We currently recognize patient service revenue net of estimated bad debt as required by this revised GAAP; therefore, we do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.

In May 2011, the FASB issued a GAAP update on fair value measurement, which eliminates differences between U.S. GAAP and International Financial Reporting Standards (IFRS), resulting in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. It also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This revised GAAP will be effective for annual and interim periods beginning after December 15, 2011. We do not expect the adoption of this revised GAAP to have a material effect on our financial position, results of operations or cash flows.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

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Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Note 4. Income Taxes

Following are the income tax provisions and effective tax rates for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Income tax provision	$	3,961		$	3,364		$	12,693		$	10,504
Effective tax rate		38.0	%		35.7	%		38.0	%		37.9	%

The difference in the effective tax rate for three months ended September 30, 2011 as compared to three months ended September 30, 2010 was due primarily to a one-time reduction in our tax liability for uncertain tax positions resulting from the lapse of statute of limitations during the three months ended September 30, 2010. The effective tax rates differ from the statutory U.S. federal income tax rate of 35.0% due primarily to state income taxes.

Our accounting policy is to include interest and penalties related to income tax liabilities in income tax expense. As of September 30, 2011, we had accrued a total of $11,000 for estimated interest and penalties related to uncertain tax positions.

The tax years 2006 to 2010 remain open to examination by the major taxing jurisdictions to which we are subject. The statute of limitations for tax years 1997 to 2005 has expired, except that the tax years 1997 to 2002 are subject to adjustment of net operating losses by the Internal Revenue Service. We are subject to taxation in the United States and various state jurisdictions. A state tax examination has been initiated for one of our subsidiaries. The outcome of such examination cannot be predicted with certainty; however, we believe that the ultimate resolution will not have a material effect on our financial position, results of operations or cash flows.

We make our best estimate of the tax rate expected to be applicable for the full fiscal year. The rate so determined is used to compute our income taxes expense for an interim period.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 5. Stock-Based Compensation

At September 30, 2011, we had a stock-based employee compensation program, for which we had reserved a total of 3,406,779 common shares for issuance. In accordance with our Equity Participation Plan (Equity Plan), for each calendar year until 2013, the number of shares authorized for issuance under our Equity Plan will increase in an amount equal to 2.5% of the total number of shares of our common stock outstanding at the close of the first trading day of each year. Pursuant to our Equity Plan, the available shares of our common stock for issuance were increased by 407,921 on January 3, 2011. As of September 30, 2011, there were 238,480 shares of our common stock available for issuance under our Equity Plan.

The options under our Equity Plan generally vest over a four-year period from date of grant, and terminate on the 10th anniversary of the agreement date. Restricted stock awards generally vest over a four-year period from date of the award.

All option awards granted during the nine months ended September 30, 2011 were issued with exercise prices equal to the closing price of our common stock on the NASDAQ Global Select Market on the dates of the grant.

Stock-based compensation expense is recognized when the options and restricted stock awards are vested, and is included in total general and administrative expenses as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Stock-based compensation expense	$	1,222	$	803	$	3,473	$	2,310

As of September 30, 2011, total unrecognized compensation costs related to non-vested stock-based compensation arrangements granted under our Equity Plan and the weighted-average period of years expected to recognize those costs are as follows (dollars in thousands).

	Total Unrecognized Compensation Cost		Weighted-average Remaining Contractual Term
			(Years)
Stock option	$	9,056		2.79
Restricted stock	$	741		3.27

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions:

	Nine months ended September 30,
	2011			2010
Risk-free interest rate		2.55	%		1.24	%
Expected volatility		39.34	%		40.00	%
Expected option life (in years)		6.16			5.83
Expected dividend yield		0.00	%		0.00	%

The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues. The expected volatility is based on historical volatility levels of our public company peer group and the volatility of our stock price since our initial public offering in January 2008. The expected option life of each award granted was calculated using the "simplified method" in accordance with GAAP.

The grant date fair value of each restricted stock award is based on the closing stock price on the grant date of the award as reported by NASDAQ Global Select Market.

The following table summarizes the option activities in our Equity Plan during the nine months ended September 30, 2011.

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value		Weighted Average Fair Value
						(Years)		(in '000)
Options outstanding as of December 31, 2010		1,309,525		$	18.92					$	8.10
Changes during period:
Granted		360,500			45.37						19.26
Exercised		(107,166	)		13.81						5.87
Cancelled/Forfeited		(4,027	)		35.99						14.47
Expired		(1,173	)		0.77						0.14
Options outstanding as of September 30, 2011		1,557,659		$	25.37		7.63	$	19,552	$	10.82
Options exercisable as of September 30, 2011		848,774		$	17.65		6.82	$	15,464	$	7.46

The following table summarizes the restricted stock award activities in our Equity Plan during the nine months ended September 30, 2011.

	Shares			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value		Weighted Average Fair Value
				(Years)		(in '000)
Restricted stock awards outstanding as of December 31, 2010		6,473						$	21.63
Changes during period:
Granted		20,812							45.91
Vested		(1,362	)						27.53
Forfeited		(427	)						40.99
Restricted stock awards outstanding as of September 30, 2011		25,496			2.79	$	910	$	40.81

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Earnings Per Share

9 Months Ended

Sep. 30, 2011

Earnings Per Share [Abstract]

Earnings Per Share

Note 6. Earnings Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income for the period by the weighted average number of shares outstanding during the period plus the dilutive effect of our outstanding stock awards and shares issuable under our employee stock purchase plan using the treasury stock method.

The calculations of basic and diluted net income per share for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands, except for share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Basic:
Net income	$	6,462	$	6,066	$	20,709	$	17,235
Weighted average number of common shares outstanding		16,419,071		16,256,757		16,370,878		16,239,672
Basic net income per share	$	0.39	$	0.37	$	1.27	$	1.06
Diluted:
Net income	$	6,462	$	6,066	$	20,709	$	17,235
Weighted average number of common shares outstanding		16,419,071		16,256,757		16,370,878		16,239,672
Weighted average number of dilutive common shares equivalents		423,176		284,275		433,426		331,196
Common shares and common share equivalents		16,842,247		16,541,032		16,804,304		16,570,868
Diluted net income per share	$	0.38	$	0.37	$	1.23	$	1.04

Outstanding stock options with an exercise price above market are excluded from our diluted computation as their effect would be anti-dilutive. At September 30, 2011, there were approximately 236,400 outstanding stock options with an exercise price above the average market price for the nine months ended September 30, 2011.

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Consolidated Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Operating activities
Net income	$ 20,709	$ 17,235
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,374	1,983
Stock-based compensation expense	3,473	2,310
Tax liability reduction for uncertain tax positions	0	(219)
Net change in fair value of contingent consideration	658	207
Changes in assets and liabilities:
Accounts receivable	(8,736)	(190)
Prepaid expenses and other current assets	4,994	5,472
Accounts payable and accrued liabilities	5	(1)
Accrued compensation	4,779	4,375
Medical malpractice and self-insurance reserves, net	2,777	1,406
Accrued professional liability settlement	0	(750)
Net cash provided by operating activities	31,033	31,828
Investing activities
Acquisitions of physician practices	(19,387)	(13,788)
Purchase of property and equipment	(2,075)	(1,827)
Net cash used in investing activities	(21,462)	(15,615)
Financing activities
Net proceeds from issuance of common stock	2,352	1,133
Excess tax benefits from stock-based compensation	1,177	345
Net cash provided by financing activities	3,529	1,478
Net increase in cash and cash equivalents	13,100	17,691
Cash and cash equivalents, beginning of period	18,935	31,473
Cash and cash equivalents, end of period	32,035	49,164
Supplemental disclosure of cash flow information
Interest	107	65
Income taxes	$ 11,843	$ 9,113

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Acquisitions

9 Months Ended

Sep. 30, 2011

Acquisitions [Abstract]

Acquisitions

Note 2. Acquisitions

In connection with the acquisition of hospitalist physician practices, we generally record goodwill and other identifiable intangible assets consisting of physician and hospital agreements. The results of operations of the acquired practices are included in the consolidated financial statements from the date of acquisition. In addition to the initial consideration paid at the close of these transactions, the asset purchase agreements generally provide for future consideration to be paid based upon the achievement of certain operating results of the acquired practices as of certain measurement dates. These additional payments are not contingent upon the future employment of the sellers. The estimated fair value of additional future consideration is recognized at the acquisition-date. Subsequent changes, if any, to the acquisition-date fair value are recognized as part of on-going operations.

During the nine months ended September 30, 2011, we completed the acquisition of assets of nine hospitalist physician practices. In addition to the initial consideration paid at the close of these transactions, the asset purchase agreements provide for additional consideration to be paid generally after the first year of operation, based upon the future operating results of the acquired practices, as defined in each purchase agreement.

The following table summarizes the total amounts recorded during the nine months ended September 30, 2011, related to the acquisition of hospitalist practices (in thousands):

Acquired assets – paid and accrued:
Goodwill	$	15,111
Other intangible assets		150
Fixed assets		3
Total acquired assets		15,264
Cash paid for acquisitions:
2011 transactions		(9,960	)
Contingent consideration		(9,171	)
Other – prior year transactions		(256	)
Total cash paid for acquisitions		(19,387	)
Decrease in payables for practice acquisitions		(4,123	)
Net change in fair value of contingent consideration		658
Net change in payables for practice acquisitions		(3,465	)
Payables for practice acquisitions, beginning of period		27,715
Payables for practice acquisitions, end of period	$	24,250

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Consolidated Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and cash equivalents	$ 32,035	$ 18,935
Accounts receivable, net	62,897	54,161
Insurance receivable for malpractice claims - current portion	8,044	6,491
Prepaid expenses and other current assets	4,678	9,672
Total current assets	107,654	89,259
Property and equipment, net	4,510	4,100
Goodwill	164,400	149,289
Other intangible assets, net	1,726	2,282
Deferred tax assets, net	2,323	2,323
Insurance receivable for malpractice claims - less current portion	14,531	11,725
Total assets	295,144	258,978
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities	3,713	3,708
Accrued compensation	24,251	19,472
Payables for practice acquisitions	24,250	27,715
Medical malpractice and self-insurance reserves, current portion	8,627	6,940
Deferred tax liabilities	784	784
Total current liabilities	61,625	58,619
Medical malpractice and self-insurance reserves, less current portion	31,320	25,871
Other long-term liabilities	23	23
Total liabilities	92,968	84,513
Stockholders' equity:
Preferred stock, $0.001 par value, 15,000,000 shares authorized, none issued	0	0
Common stock, $0.001 par value, 50,000,000 shares authorized, 16,443,255 and 16,287,377 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	16	16
Additional paid-in capital	137,663	130,661
Retained earnings	64,497	43,788
Total stockholders' equity	202,176	174,465
Total liabilities and stockholders' equity	$ 295,144	$ 258,978